The stock market closed higher on Monday after flirting in bear market territory at the end of last week.
Stocks opened higher Monday morning after a dramatic close Friday with the S&P 500 closing just above bear market territory, down more than 18% from its January 2022 high. After rising slightly just after opening bell Friday, at one point the S&P 500 dropped 20.5%. This is the first potential bear market we’ve seen since the start of the Covid-19 pandemic.
A bear market is defined very specific: it’s when the market is down 20% from a recent high.
The S&P 500 and Nasdaq are down for the seventh week in a row, and the Dow is down for eight. This all arrives on the heels of disappointing earnings from major retailers like Target and Walmart, which suggests companies and consumers are starting to feel the effects of inflation. These stocks are traditionally considered safe havens, but as they plummeted last week, it seems like no retailer is immune to the economic conditions caused by rising interest rates, a recovering supply chain, high fuel prices, and the ongoing war in Ukraine.
During all this volatility, it may seem like as an investor you should sell everything and run for the hills, but don’t. Volatility is normal, and if you’re a long term investor, these severe drops won’t affect you for years — or even decades — from now. Remember, you only lose money on your investments if you sell when the market is low. This is known as capitulation. History tells us the market has always recovered, even (and especially) after losing years like we’re experiencing now.
During market downturns like this, it’s always important to remember why you’re investing. Investing takes patience and determination, and it’s for the long run. As an investor, don’t panic and get worried about these drops. Refocus your energy and remember that volatility is normal, and drops like this happen.
Jeremy Schneider, founder of Personal Finance Club told his followers on Instagram that investing is “slow and calm.”
“It’s a game of decades, not days. It’s buying and holding assets that pay dividends and are likely to go up in value over long periods of time,” he says. Don’t try and time the market as some investors do. Stay the course and remember that you’re in it for the long haul, not a short while.
The market looks forward and reacts quickly. As an investor, you should look forward, too – but instead of reacting, the best response is to stay on track and keep investing.
How Investors Should Deal With Stock Market Volatility
For new investors, big swings in the market can be a lot to handle. There’s a lot of uncertainty right now because of interest rate hikes, increasing real estate prices, and everyday commodities getting more expensive because of inflation — and the market reflects that on a day-to-day basis.
But if you have a buy-and-hold strategy with low-cost, broad-market index funds, remember that slow and steady wins the race. The best performing portfolios are ones that have the most time in the market.
Even — and especially — when there’s volatility in the stock market, the best course of action is to be aware, but stick to your investing plans. It’s impossible to time the market, and historically speaking, it’s always recovered. Stay level headed through the dips and peaks, and remember why you’re investing.
“The most important thing is to always remember what you’re investing for,” says Thomas Muñoz, financial life advisor at Telemus, a financial advisory firm. “Short-term volatility is obviously something people should be aware of. But if you have a long-term time horizon, historically the stock market goes up. And when that’s the case, it’s important to have the discipline to keep dollar-cost averaging your [investments].”
Dollar cost averaging spreads out your deposits over time, and has demonstrated that it performs better “during a period of high market crashes,” according to Rebecka Zavaleta, creator of the investing community First Milli.
Whatever you do, invest early and often, especially if you have a long investment timeline. Dips and crashes will happen, and so will other scary-sounding things like economic bubbles, bear markets, corrections, death crosses, and recessions.
You can even take advantage of a dip to invest more, but not if it impacts your regular investing schedule, Muñoz advises. It’s hard to tell when there’s going to be a dip or correction, and “not even the best investors in history can time the market.” The best advice is to stick to your plan and keep investing.